Introducing a New Broad-based Index of Financial Development

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Summary:

There is a vast body of literature estimating the impact of financial development on economic
growth, inequality, and economic stability. A typical empirical study approximates financial
development with either one of two measures of financial depth – the ratio of private credit to
GDP or stock market capitalization to GDP. However, these indicators do not take into account
the complex multidimensional nature of financial development. The contribution of this paper is
to create nine indices that summarize how developed financial institutions and financial markets
are in terms of their depth, access, and efficiency. These indices are then aggregated into an
overall index of financial development. With the coverage of 183 countries on annual frequency
between 1980 and 2013, the database should offer a useful analytical tool for researchers and
policy makers.